AllianceBernstein Holding L.P. (AB) Earnings Call Transcript & Summary

Great. Well, welcome back. Hopefully, everybody had a chance to grab something to eat, as we kind of get going for our next session. I would love to welcome Seth Bernstein, President and CEO of AllianceBernstein. AllianceBernstein is a global, diversified asset manager with over $850 billion in AUM and robust capabilities across fixed income, private markets and global equities. In addition, the firm's partnership with Equitable and its sizable wealth management franchise create unique product development opportunities further supportive of the firm's growth outlook. We look forward to getting an update from Seth on the business and his perspective on the landscape broadly as we look out here into 2026. Seth, always great to see you. Welcome back. Thank you for being here.

Thank you. The only reason I come to this hotel is for this?

Look, we'll take what we can get. I mean, you and I have this conversation every year, and there's just...

This place is a dump.

But you do have a great time here. You got...

I do.

From what I heard, we're in the service economy and the experience economy. So this is what you're after. But we're not in the infrastructure or maybe infrastructure, not in the manufacturing economy, so here we go.

Okay. All right. With that said, let's talk about the allocation trends. So 2025 was clearly a pretty volatile year, but ultimately, equity markets delivered pretty healthy returns and credit spreads are still super tight. So given the setup and also layering in lower interest rate prospects, how are clients allocating into 2026? What are some of the themes you guys are paying attention to at a kind of macro sort of asset allocation level?

I think there are -- I think there are 2 or 3 themes that are worth really digging into. First, look, we think inflation is going to be higher going forward than it's been in the past. So getting real returns that are going to be interesting, I think it's going to be tougher than it's been in the past 5 or 6 years. And getting diversification at the same time, I think it's going to prove challenging as well, particularly given how most people are set up today. First and foremost, the U.S. is not cheap on any measure. In fact, it's rich. On fixed income, spreads are tight. Returns have been pretty strong in fixed income as well as in equities. And as you know as well as I do when sort of cyclically adjusted returns, rates are at the level they are today, it's very hard to repeat that. So averaging 20% kind of returns for 3 years is heroic. So the notion that doing what you did in the past is going to do well for you going forward, I think it's a particular challenge, getting diversification is a challenge. So what does that mean to us? I think it means, first and foremost, we need to readjust our expectations. Secondly, recognize that your true exposures to the U.S. are really large, larger than they've ever been, not just because the U.S. is a larger proportion of MSCI World or equity, but because your private equity allocations are primarily American. And so when you put them all together, plus your U.S. dollar fixed income exposures, you are making a very big bet on a country where, at least from my perspective, dollar weakness is not a temporary phenomenon. I think the administration wants a weaker dollar despite talking about the reserve currency status and everything else. And if you look at returns offshore, they've been compelling versus the U.S. And not all of that is dollar devaluation. A lot of it is valuation differentials. A lot of it is better governance, stronger growth opportunities in foreign markets, particularly in Asia, where we've seen it. But even Europe, emerging markets have been quite strong this year. So we are really pounding the table of our clients to be thinking about moving more offshore. Most Americans have an allergy to doing that, but people offshore don't have that same degree of allergy. And so we're seeing much more interest -- we're seeing interest on the institutional side, even here in the U.S., much more interest in retail and institutional, outside the U.S. for those, please, still pretty comfortable with dollar fixed income assets. You can ask yourself why, but it is the best and deepest market. So it will continue to be an important source, particularly for those countries that are dollar linked. So for example, we're seeing better flows from Asia in AIP and the weakness in the yen has actually been beneficial to us in our Japanese business. So it's been a pretty good story for us there. So moving people offshore, I think, has been the critical message that we want to give people. I would note, if you look at the returns from gold, I think that's an indicator of dollar devaluation concerns, really more foreign driven than U.S. local, but they're real. And we see that concern and resistance. And when I travel abroad with consultants and institutions, it's -- everyone wants to talk about Washington and Fed appointments and so forth. So I think we shouldn't just dismiss it and I don't think it's episodic. I think it's with us for a while.

Yes. Super interesting. Let's take these themes and maybe translate it into some of your own business, starting with fixed income. And I feel like for the last 2 to 3 years now, you and I have these conversations, and we've always had these conversations with other CEOs of other asset managers. And there's been this wall of money that's been sitting in money market funds, kind of waiting for that to eventually rotate into fixed income vehicles, especially when we get a little bit of a steeper curve. It feels like we're finally starting there...

I think we're there. I mean, look, earlier this year, it certainly had slowed down and reversed. We do still see in our private wealth business, for example, a lot of people still in cash. And money market are still near record highs. So I think it's there. I think you don't have to go far out the curve just given how steep it is. And so we're seeing a lot more interest in sort of intermediate duration kinds of assets. We continue to see -- and I think part of it is our growth relative to others in the muni market, but that SMA demand continues to be pretty robust for us. So that feels pretty good. There continues to be a strong bid for high yield. And frankly, in the investment-grade side, very strong demand from institutions. That's robust as well. And that's interesting because you've had so much issuance. I mean, extraordinary issuance, unparalleled even just given that there hasn't been a rate move to really justify that. It's really a need to move.

Yes. And I guess, presumably, when you get the movement in lower interest rates, despite the fact that credit spreads are really tight, that maybe actually creates a little bit of a support level for like high-yield fixed duration...

Yes, because they're looking at absolute -- they're looking at absolute levels. And so they're okay by that...

That makes sense.

The back end, I think, of the curve has a risk of actually widening, right, going up, because there's a lot of issuance need for the treasury to go out and fund. So I think that's why that steepness is going to persist and why you're going to see more money move out of money market funds over time.

So how are you guys positioned to capture that? Because AB obviously has a very long track record in fixed income, really good long-term returns. The 1-year numbers, I think, has gotten little bit stronger. So how do you think about your competitive position if we do, in fact, see a much bigger wave of capital coming back into fixed income...

It hasn't been hurting us in Asia. In the U.S., look, our 3- and 5-year are still quite strong. And the last month or so have been better from a performance perspective. So we're beginning to see -- it was due to duration where we were really seeing that weakness. So I think we're pretty well positioned to capture it. But I think it's still going to be fairly so, I think people are less reactive than they used to be to this stuff. They're biding their time and waiting. And look, you're still making 365 or whatever it is in money market...

And there's less...

And you're making good returns, so -- but I think it's there. And certainly, your margin to be there as shrunk considerably.

Yes. Yes. I was really intrigued by the comments you made on the last earnings call related to your global equity franchise, and you kind of alluded to some of that in your first response as far as the themes go. But look, clearly, the active equity space for the industry has been really challenged for a long period of time. The appetite for global equities, non-U.S. equities, to your point, is starting to improve a little bit. So let's just double-click in terms of what that means for you guys? How are you positioned to capture that sort of rotation if and when that does start to occur?

So what is interesting just on the sort of non-U.S. track is that we're seeing interest in EAFE product for the first time outside of the United States. And that's more from consultants and institutions who want to reduce their U.S. exposure. But remember, that product was designed for Americans. So those were international funds. But for people who want to increase their allocations globally, but other than the United States, we see a lot of talk going on there. I mean even to the point of talking about putting them on platforms outside the United States, which typically you wouldn't have seen historically. Europe, there's more interest. Asia, there's more interest. I wish I could tell you it's showing up in U.S. retail flows. It's not yet. Americans are going to be the last people to move offshore. China has begun to attract more interest within Asia, and we think in Europe, and we're seeing it in our own numbers. I wish I could tell you it's strong. It's beginning to become more meaningful, but it's not powerful yet. And Japan, which has already had a pretty strong track record for a couple of years, continues to show interest, even though I don't think the value there justifies it. But I think emerging markets -- look emerging market cycles kick in, in periods of dollar weakness. And I think there's an argument to really focus, particularly in Asia in emerging markets. So we're feeling pretty good about that.

Great.

Also value works better outside the U.S.

Yes. Well, especially, I guess, relative to where U.S. valuations are in the concentration, right? All right. Let's move from maybe the asset class and the kind of product strategies to more of the wrappers in some of the channels. First, I would love to spend a couple of minutes on active ETFs. It's been a big theme for the space. It's been growing rapidly. You guys have been early. I think you're running at about $10 billion in AUM across the...

And we have about 20 strategies. About 60% of that is net new flows to us. I think you've got to net out the rewrappings and the conversions in these numbers, right? Because -- and -- but we do see it as how we will continue to grow in U.S. retail for sure. But we're also seeing interesting appetite in Australia and Taiwan. We have a joint venture we've just announced in Japan with the largest -- the largest digital distributor in Japan for ETFs. So we're actually kind of excited that, that adoption is beginning to catch a bid outside the U.S. in a more meaningful way.

How are you thinking about the product road map here, either conversions or launching new strategies? What's most suitable for an active ETF wrapper where you actually feel like you've got the right to win and really just the wrapper that was the issue. So as you think about the contribution...

So, let me give you a good example. We -- we have done, I think, very well in building our reputation for being the place you go for muni SMAs. It's really resonated with our largest distributors, whether it's Morgan Stanley, Merrill Lynch, UBS and others. It's now gone to the next level down, and it's deepening, mass customization, where we're really able to design more customized benchmarks for people who want exclusions or single states or whatever. We do it on an automated platform that's worked. And one of the things we got back from the RIAs was you don't have a vehicle, we can't use SMAs for the smaller children accounts that often are a part of this. Our National Muni SMA that we've -- I'm sorry, our National Muni ETF that we've launched this year is a natural complement to those things. So it fits a need. It's speaking to the same client, that's important, and that is resonating with our clients. In addition, we think it's going to be in more thematic stuff like security of the future, which we've raised $2-point something billion in 1.5 years on, where people are thematically thinking about supply chains and defense and other areas that are really important are ultrashort and sort of short duration fixed income products. Those are areas where we will continue to focus in. In the United States, in particular, the only places we're going to issue mutual funds going forward, I think, is where there's a particular restriction, which causes us not to think the asset suitable for an ETF vehicle or where like in 401(k) plans where adoption is restricted for silly reasons, but it would really be by exception that you would be using it going forward. But I think it will be a continuing area of innovation for us. And I'm really kind of interested in Asia, having a much bigger potential interest in ETFs than potentially even Europe does.

Great.

And I think part of that's because of digital engagement in Asia is so high.

Got it.

[indiscernible] is more important than it is for the [indiscernible] in Italy and stuff like that.

Yes. That makes sense. One of the -- one of the features I really like about your guys' story is during earnings calls, you guys do take the time to feature different businesses, which I feel like has been always really helpful to spotlight various attributes of the firm. One of the recent ones you talked about was your presence in the defined contribution market, which is a big business for you guys, right? It stands about $105 billion in assets. It seems like sales momentum has been also building quite nicely. Can you expand on how the recent advisory opinion from the DOL regarding lifetime income and for those who don't know, maybe spend a minute on what that really is? And really just help us think about how you're trying to further commercialize this model because those are also tend to be maybe fee dilutive...

Yes. So let's talk about that because I think it's a complicated sector. Look, as everyone in this room knows, unless you were a municipal or federal employee, you don't have a DB plan for the most part, right? So D.C. is the preponderant non-real estate asset that most people in the United States have. They have to manage it. Most people do not have the skill set and really shouldn't be trying to build an asset allocation and build the underlying verticals of that. And so target dates make enormous sense. You still need to do changes in them. And just on the side that you didn't raise, target dates, if they really are to serve the purpose, need to go through retirement rather than end at retirement because the last thing, frankly, someone my age 64 wants is to look at their 401(k) plan and notice that it's in cash or near cash holdings. That's a crazy construct when I hopefully have 30 years more of my life to live, right? That takes -- that takes a fiduciary who's willing to own you as a client through your retirement. So you have a bit of an agency risk in the United States, which, frankly, the Australians and some others have been very good at adapting through building the super funds because there is an institution actually thinking about you. A part of that element that was important is that annuities for most Americans should play a very important part of their retirement because most Americans will outlive their income, right, from their assets. People overvalue security, people overvalue certainty, annuities give them that capability. Annuities get a bad wrap, maybe fairly historically because we're laden with fees and complexity and you have counterparty risk and everything else. But if you can put them into a target date, price it institutionally rather than for a retail audience with no broker's commission and everything else embedded in it. And frankly, buy those annuities further out, i.e., when you have a much deeper pool of demand to buy those annuities. You might find that it can become a meaningful portion of somebody's retirement pool. The opinion that the Department of Labor gave us -- gave us a safe harbor from a litigation perspective for a plan sponsor to include that. We've been working on this for 10 years. We were, if not the first amongst of those. You just saw Vanguard announced with TF, a similar kind of structure, BlackRock went into this 2 or 3 years ago in this. I think it will be slow to move because D.C.'s plan sponsors by their nature, are really risk adverse. They're really attendant to costs. And this will take time. And I think those barriers will impact the adoption of private into the 401(k) space of it. That doesn't mean it's not a reasonable home for privates, but it's going to be at a lower cost than it is being sold to retail today because that's just part of the trade-off that's going to get it into these. But frankly, as a public policy matter, it's probably a good home for it, properly sized, properly...

Great. No, it looks like a really interesting opportunity. And to your point, there's been others that try to have these kind of guaranteed decumulation, so having some safe harbor language will be helpful...

The sell process for these kinds of target date and customized target dates can be 2, 3, 5 years. Now we have 2 big ones coming on for next year. We are having more conversations than we've had maybe ever since the advisory opinion because people don't want to be the first ones at the station. And again, I think 10, 15 years from now, you're going to see this as a very significant part of people's retirement that is having an annuity built into the plan itself. It's still very early days, and this sector is slow adopter.

Do you think it's the existing target date firms and people with already big DC footprint that will ultimately be also the winners here and own this? Obviously, it will be good for insurance companies, annuity writers because that's a new sort of TAM for them to go after. But who wins in that market place?

I think it is the existing ones, but the composition is going to change. It's going to be much more passive in the traditional segments. And you're already seeing that, whether it's JPMorgan or others who have adopted to do it. And they'll leave active where they have a more symmetric payoff pattern to having active in it, and private being an example where that, I think will be manifest. So I think it will be the cost of transition is so brutal. And remember, you're not selling necessarily to the Treasurer or the CFO, you're selling it to the human resources group, right? And you're dealing with tens of thousands of retirees and current employees that has a way of sucking up management time. So their appetite to make these changes is incredibly low.

Right. Right. Okay. Well, speaking of private markets, let's talk a little bit about that. So you guys have a target obviously out there. You're aiming to be at about $90 billion to $100 billion in private markets AUM by '27. Clearly on your way there. I think, you're about $80 billion.

I think we're closing in on $90 billion. I think it's a big number.

Right. So it's certainly on your way within the range...

Look, I mentioned that we're going to make that target.

Yes. I think you've said that a couple of times. Even last year, I think you did. So I'm glad you're staying true to your story. No, look, can you talk about the path of going kind of beyond that, right? Like, to your point, you're sort of at target. What's growing quickly? Where do you guys think the next leg of growth is...

Okay. So let me -- I mean, there are a number of pillars. First, let's just go back to Equitable for a moment because they've given us $20 billion, of which I think we have $3-odd billion yet to spend approximately or deploy. But that's not the cap on it. We will have more assets from Equitable next year and the year after as they grow their general account, but also because they're going to move more of their assets to us over time in that space. So whether it's refinancing or other stuff that we will have that opportunity. So that continues to grow, and they will continue to seed new strategies to the extent it makes sense for them and us to do that. There's things they can do and can't do. But they're there to standby to make that happen. Secondly, third-party institutional. We've gotten a lot of support this year from consultants, particularly for PCI, which is our middle market lending, which has led us to a number of wins that have been really satisfying for us to get both in the U.S. and elsewhere. But also for CarVal as well. We see that as an important growth factor. Thirdly, third-party insurance. Our insurance vertical, we have, I think, 9 new insurance clients this year, 2 of whom we've done sidecar deals with, and we continue to look at sidecars. That's part of why the flywheel with Equitable works because we rely upon them for the underwriting, the understanding the insurance lending rider risk there. I don't want to go and outsource that. Someone who -- I want that person align with me because that's the risk I don't understand and don't have the experience with. But that has continued to grow at a pretty good rate. We continue to talk to other parties. Most of whom are not predicated on the sidecar relationship or anything else. That arose from the fact that we merge both Equitable and AB's insurance capabilities, whether it's their general account or what we're doing under one team led by Jeff Cornell, who used to be the CIO of AIG's U.S. business, Corebridge. He's part of a much broader network of AIG people who, by the way, are everywhere. And I think it's given us credibility, whether it's in public markets or private to have a right to win around that table. So that's been a third important pillar. Private wealth and the broader wealth channel have been growing this year. We were named Interval Fund of the year for CarVal's new -- for it's 2025 Interval Fund, which we're excited to have. The Credit Value Fund VI has launched and up and out. We've seen real demand in Latin America and in the Middle East and Asia port. So I feel that's been a pretty good launch for us. And I guess, finally, as we were just talking about in the retirement space, we absolutely see private credit, in particular, being part of a customized glide path. And we've already started doing that in a couple of -- a couple of our clients mandates, and we've done it outside the U.S. as well.

Yes. So it feels like lots of room beyond this $90 billion to $100 billion...

Yes, I don't know what the number is. I would be disappointed if it wasn't right.

So we spent -- in your answer to some of this, you talked about private credit, and I think it's worthwhile spending just a couple of minutes on that. You guys run a wide range of private credit strategies. Obviously, there's middle market lending, asset-backed finance, I would put real estate lending in the same general account...

Although there are a lot of different flavors of real estate within there.

Totally. But when we sort of zoom out, there's been relative to the actual issue, the number of headlines and like clickbates has been kind of enormous in the last few months related to private credit. Anything on the ground you're seeing that you find worrisome, anything within your portfolios that you'll say, "hey, that's worth paying attention to." And as you kind of survey the landscape and things that you do within private credit, does anything particularly stand out?

Look, I think we'd be -- we'd have our heads in the sand not to acknowledge that there is -- there are many more competitors out there with a lot of capital being thrown around, and terms are weaker than they were 3, 5 years ago. That's just undoubtedly true.

In which part, like when you kind of think of direct lending mostly or where are you...

Principally in direct lending. Lower middle market is still in pretty good shape, but -- because the banks really don't play in that space and the larger private equity firms don't really play in that space on the loan side as much. There are a couple of exceptions. In securitized, you can -- people have been stretching for yield and taking more risk, whether it's in CLOs and BBBs and below. You know that individuals without a social safety net, we're beginning to see deterioration in ABS. We're beginning to see it in non -- in subprime mortgage space and everything else. We've tried to stay away from those areas generally. It doesn't mean we don't occasionally have exposure to them, but they've been really pretty nominal and manifests typically a carve out and opportunistic strategies where we have it. But I would say to you, when we look at the big blow-ups, they seem to us to be idiosyncratic rather than systematic, some of it because of sloppy underwriting for sure. And we're not immune to it. We have exposure to first brands, but it's an exposure that we've had for 3-plus years. We've been in the warehouse. We've counted our inventory. We didn't lend against receivables. We have the inventory, and we've counted it. We see it. We know it's there. It's going to be a long work out. People are going to attack us, but we're feeling pretty good, and that's been the 13% yielding investment for CarVal for a number of years. And we're pretty comfortable that our clients are going to see their money back from that particular piece of the investment. But there's stuff out there that we have to be careful. We have to focus not on pushing our people to deploy the money, but to do it in a thoughtful way. And to elevate and raise issues quickly rather than hide them because nothing gets done when you sit on this sort of stuff. You just take action quickly to mitigate it.

Is that starting to impact your conversations with LPs at all in a negative way? Because it feels like LPs are asking questions, but we haven't really seen any material pullback from allocation towards private credit. So any of those concerns propping up or...

Our principal clients are insurers who tend to be more knowledgeable and sophisticated. We haven't seen it yet because we haven't really seen it emanate into those portfolios yet.

Sure.

But it's no question, it's clickbait, as you said, people are talking about it. And I would just say to you, if there are problems emanating there, there are problems emanating in credit markets everywhere, and we just need to manage them. It seems manageable at the moment, but we need to be attuned to it.

Very fair and balanced answer. Let's pivot to maybe P&L for a couple of minutes. I wanted to start with a question around institutional pipeline. You guys, I think, as of the last quarter, were at around $12 billion of wins. I think private credit is probably a decent part of that as well, that will turn off to get deployed. How are you thinking about that flowing into management fees, just the pace of deployment, pace of those mandates closing?

Well, in the RGA, for example, we've funded about 40% of that original sidecar mandate, which would have been in the backlog. We haven't funded the other sidecar, which is $1.5 billion. And there's a third sidecar that Equitable did that is beginning to fund now as well. So it's translating fairly quickly. We see it as sort of the next 12 to 18 months of a lot of that being deployed. Could it stretch out? Sure, but that's sort of where we see it. We've had pretty good visibility on the fundings to date, particularly where the existing blocks of business rather than where it's there as people are continuing to write new risk. So I don't -- we've won some interesting equity and fixed income, traditional mandates. We have some lumpy, as I mentioned before, customized target date stuff on the pipeline. But I think it's in sort of that region. I mean there's no blockbuster I'm aware of that we haven't really disclosed to the market.

Yes. When we think about the revenue base and the fee rates of the business, you guys have been fairly stating this kind of 38, 39 basis point range. And there's a little bit of a barbell effect, right, because on the one hand, I feel like you guys have a lot of alts that are growing. The retail business seems to be growing and if global equity start to contribute, that's pretty attractive. But then at the same time, like SMAs and some of the lower fee dynamics are also contributing, right? So as you think about the evolution of that fee rate over the next couple of years, knowing what you kind of hope to accomplish from an organic perspective, how does that fee rate evolve?

Well, I think your characterization is correct. We have higher fee privates coming in. We have higher fee public equities going out, although that's tempering a bit. But we're going to have down months, down quarters. It's just how it is, and it's going to be lumpy as it goes. But I would say we think it's a pretty durable fee rate. We can continue to hold in here. But of course, that can change in any given quarter around those numbers. And so we did a little better than we -- in the third quarter than we did in the second quarter. I don't know what we're going to do in the fourth quarter, and that's that, but I think it's pretty durable.

Yes. Great.

And also remember, performance fees and derivative fees we make, I'm sure none of that fits into our base fee ratio, that's separate and apart.

Yes. Well, and the performance fee angle had a really nice story for the last couple of years...

It has. I mean we benefited last year...

That was a pretty strong fourth. But yes, great. All right. So to just maybe wrap it up, a question on profitability. I know that's been obviously a focus for you guys for the last couple of years, given some of the action steps you've made, also the divestiture of the research platform. So there's a few things that have come together to now kind of having this 33%, 34% overall operating margin. I think this year is actually tracking a little bit below what the target was in the beginning of the year marginally so...

No, I don't think so. I think it is sort of where we said.

I was looking at like 40 bps, but call it rounding. I know...

I think we're pretty close...

Basis point here and there... Okay. So -- but I guess if you think about similar to fee rate, sort of the evolution of the business and where you're allocating your resources, how much runway do you still see in the operating leverage in the franchise and what drives that?

Ignoring markets.

Right. Because that's really the principal that's driving the market.

Look, I think the positives that we have working for us is pretty strong noncomp expense control. Two, we've made a big investment in building out India as a platform for us, and we're hopeful that frankly, we're going to move much of our new hiring offshore from the U.S. and minimize hiring here. That will take some time to show, but I think it's there. Thirdly, we will continue to be pushing private alts pretty aggressively, and we have a pretty good pipeline of visibility to new opportunities there. So I think we feel pretty comfortable in this margin range right now. Private wealth is a lower-margin business. It's a gem of a business. And it's -- it's less than 20% of our assets. It's 1/3 of our revenue. It's an important part of the business, and we want to grow it. You're asking me where I want to spend time. We are not going to participate in auctions for RIAs. I just -- I can't make the math work. But I think there are going to be real opportunities there, and we're going to continue to accelerate the growth of organic hiring in the business, but we've been looking a lot at RIAs as an area for us. I think if we really had a market correction and it's sustained for a while, you've got to get people off their anchor of the valuation what the buyout firms paid for these things, because I just don't understand how the math works absent markets continuing to grow. I just -- I'm boggled by it.

Yes. And I think you and many others as well. Great. Well, we're actually right at time. So with that, thanks so much...

Thank you.

Great to see you as always.

And you...

I can't promise you a different venue next year, but I hope you're still here...

Thank you.